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Business Cycle In this lesson, students will be able to identify characteristics of the business cycle. Students will be able to identify and/or define the following terms:

Business CycleExpansion

PeakContraction

Trough

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A business cycle is a period of macroeconomicexpansion followed by a period of contraction.

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The Four Phases of a Business Cycle

• There are four phases in a business cycle:

Expansion: a period of economic growth

Peak: the height of the expansion

Contraction: a period of economic decline

Trough: the lowest point of the contraction

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When an economyis expanding or

growing, many peoplehave jobs and manygoods and servicesare being produced

and sold. At the peakof the expansion,

Gross Domestic Productis as high as it will

go for that particularbusiness cycle.

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During aperiod of

contraction,more people

are unemployedand fewer goodsand services arebeing producedand sold. Notall contractions

are equally severe.

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Recessions and Depressions

• Each phase of the business cycle is determined by monitoring Gross Domestic Product.

• A contraction that lasts for at least six months is called a recession.

• A particularly severe and long contraction is called a depression.

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The GreatDepression

was the mostsevere economiccontraction in the

history of the world. It

permanentlychanged the wayeconomists think.

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Factors Which Affect the Business Cycle

• The following four factors can affect the business cycle:

Investment in Businesses

Interest Rates

Consumer Expectations

External Shocks

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The more money people invest in businesses, the more money businesses have to grow.

Investment affects the business cycle.

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Interest is the price of borrowed money. Wheninterest rates are high, people borrow less.

Businesses borrow less too.Interest rates affect the business cycle.

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When people are optimistic about the future,they spend more money. Optimism affects

the business cycle.

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External shocks can be positive or negative.An earthquake is a negative external shock.

It affects the business cycle.

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Throughout American history, there have beenmany business cycles.

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Questions for Reflection:• Define the business cycle.

• What are the four phases of the business cycle and explain each phase?

• What are the four factors that affect the business cycle and how does each factor affect the business cycle?

• What is the relationship between Gross Domestic Product and the four phases of the business cycle?